[Federal Register Volume 89, Number 105 (Thursday, May 30, 2024)]
[Notices]
[Pages 46937-46944]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-11804]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-100224; File Nos. SR-NYSEARCA-2023-70; SR-NYSEARCA-
2024-31; SR-NASDAQ-2023-045; SR-CboeBZX-2023-069; SR-CboeBZX-2023-070; 
SR-CboeBZX-2023-087; SR-CboeBZX-2023-095; SR-CboeBZX-2024-018]


Self-Regulatory Organizations; NYSE Arca, Inc.; The Nasdaq Stock 
Market LLC; Cboe BZX Exchange, Inc.; Order Granting Accelerated 
Approval of Proposed Rule Changes, as Modified by Amendments Thereto, 
To List and Trade Shares of Ether-Based Exchange-Traded Products

May 23, 2024.

I. Introduction

    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Exchange Act'') \1\ and Rule 19b-4 thereunder (``Rule 19b-4''),\2\ 
each of NYSE Arca, Inc. (``NYSE Arca''), The Nasdaq Stock Market LLC 
(``Nasdaq''), and Cboe BZX Exchange, Inc. (``BZX'', and together with 
NYSE Arca and Nasdaq, the ``Exchanges'') filed with the Securities and 
Exchange Commission (``SEC'' or ``Commission'') proposed rule changes 
to list and trade shares of the following. NYSE Arca proposes to list 
and trade shares of (1) the Grayscale Ethereum Trust \3\ and (2) the 
Bitwise Ethereum ETF \4\ under NYSE Arca Rule 8.201-E (Commodity-Based 
Trust Shares); Nasdaq proposes to list and trade shares of (3) the 
iShares Ethereum Trust \5\ under Nasdaq Rule 5711(d) (Commodity-Based 
Trust Shares); and BZX proposes to list and trade shares of (4) the 
VanEck Ethereum Trust,\6\ (5) the ARK 21Shares Ethereum ETF,\7\ (6) the 
Invesco Galaxy Ethereum ETF,\8\ (7) the Fidelity Ethereum Fund,\9\ and 
(8) the Franklin Ethereum ETF \10\ under BZX Rule 14.11(e)(4) 
(Commodity-Based Trust Shares). Each filing was subject to notice and 
comment.\11\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Amendment No. 2 to Proposed Rule Change to List and 
Trade Shares of the Grayscale Ethereum Trust under NYSE Arca Rule 
8.201-E (Commodity-Based Trust Shares) (SR-NYSEARCA-2023-70), filed 
May 21, 2024, available at https://www.sec.gov/comments/sr-nysearca-2023-70/srnysearca202370-475871-1363474.pdf (``Grayscale 
Amendment'').
    \4\ See Amendment No. 1 to Proposed Rule Change to List and 
Trade Shares of the Bitwise Ethereum ETF under NYSE Arca Rule 8.201-
E (Commodity-Based Trust Shares) (SR-NYSEARCA-2024-31), filed May 
21, 2024, available at https://www.sec.gov/comments/sr-nysearca-2024-31/srnysearca202431-475891-1363514.pdf (``Bitwise Amendment'').
    \5\ See Amendment No. 2 to Proposed Rule Change to List and 
Trade Shares of the iShares Ethereum Trust under Nasdaq Rule 5711(d) 
(Commodity-Based Trust Shares) (SR-NASDAQ-2023-045), filed May 22, 
2024, available at https://www.sec.gov/comments/sr-nasdaq-2023-045/srnasdaq2023045-475851-1363454.pdf (``iShares Amendment'').
    \6\ See Amendment No. 2 to Proposed Rule Change to List and 
Trade Shares of the VanEck Ethereum Trust under BZX Rule 
14.11(e)(4), Commodity-Based Trust Shares (SR-CboeBZX-2023-069), 
filed May 21, 2024, available at https://www.sec.gov/comments/sr-cboebzx-2023-069/srcboebzx2023069-475811-1363394.pdf (``VanEck 
Amendment'').
    \7\ See Amendment No. 2 to Proposed Rule Change to List and 
Trade Shares of the ARK 21Shares Ethereum ETF under BZX Rule 
14.11(e)(4), Commodity-Based Trust Shares (SR-CboeBZX-2023-070), 
filed May 21, 2024, available at https://www.sec.gov/comments/sr-cboebzx-2023-070/srcboebzx2023070-475812-1363414.pdf (``ARK 
Amendment'').
    \8\ See Amendment No. 1 to Proposed Rule Change to List and 
Trade Shares of the Invesco Galaxy Ethereum ETF under BZX Rule 
14.11(e)(4), Commodity-Based Trust Shares (SR-CboeBZX-2023-087), 
filed May 21, 2024, available at https://www.sec.gov/comments/sr-cboebzx-2023-087/srcboebzx2023087-475831-1363395.pdf (``Invesco 
Amendment'').
    \9\ See Amendment No. 2 to Proposed Rule Change to List and 
Trade Shares of the Fidelity Ethereum Fund under BZX Rule 
14.11(e)(4), Commodity-Based Trust Shares (SR-CboeBZX-2023-095), 
filed May 21, 2024, available at https://www.sec.gov/comments/sr-cboebzx-2023-095/srcboebzx2023095-475791-1363374.pdf (``Fidelity 
Amendment'').
    \10\ See Amendment No. 1 to Proposed Rule Change to List and 
Trade Shares of the Franklin Ethereum ETF, a Series of the Franklin 
Ethereum Trust, under BZX Rule 14.11(e)(4), Commodity-Based Trust 
Shares (SR-CboeBZX-2024-018), filed May 21, 2024, available at 
https://www.sec.gov/comments/sr-cboebzx-2024-018/srcboebzx2024018-475813-1363434.pdf (``Franklin Amendment'').
    \11\ Comments received on SR-NYSEARCA-2023-70 are available at 
https://www.sec.gov/comments/sr-nysearca-2023-70/srnysearca202370.htm. Comments received on SR-NYSEARCA-2024-31 are 
available at https://www.sec.gov/comments/sr-nysearca-2024-31/srnysearca202431.htm. Comments received on SR-NASDAQ-2023-045 are 
available at https://www.sec.gov/comments/sr-nasdaq-2023-045/srnasdaq2023045.htm. Comments received on SR-CboeBZX-2023-069 are 
available at https://www.sec.gov/comments/sr-cboebzx-2023-069/srcboebzx2023069.htm. Comments received on SR-CboeBZX-2023-070 are 
available at https://www.sec.gov/comments/sr-cboebzx-2023-070/srcboebzx2023070.htm. Comments received on SR-CboeBZX-2023-087 are 
available at https://www.sec.gov/comments/sr-cboebzx-2023-087/srcboebzx2023087.htm. Comments received on SR-CboeBZX-2023-095 are 
available at https://www.sec.gov/comments/sr-cboebzx-2023-095/srcboebzx2023095.htm. Comments received on SR-CboeBZX-2024-018 are 
available at https://www.sec.gov/comments/sr-cboebzx-2024-018/srcboebzx2024018.htm.
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    Each of the foregoing proposed rule changes, as modified by their 
respective amendments, is referred to herein as a ``Proposal'' and 
collectively as the ``Proposals.'' Each trust (or series of a trust) 
described in a Proposal is referred to herein as a ``Trust'' and 
collectively as the ``Trusts.'' As described in more detail in the 
Proposals' respective amended filings,\12\ each Proposal seeks to list 
and trade shares of a Trust that would hold spot ether,\13\ in whole or 
in part.\14\ This order approves the Proposals on an accelerated 
basis.\15\
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    \12\ See supra notes 3-10.
    \13\ Ether is a digital asset that is native to, and minted and 
transferred via, a distributed, open-source protocol used by a peer-
to-peer computer network through which transactions are recorded on 
a public transaction ledger known as ``Ethereum.'' The Ethereum 
protocol governs the creation of new ether and the cryptographic 
system that secures and verifies transactions on Ethereum.
    \14\ All of the Trusts propose to hold spot ether. Additionally, 
all of the Trusts, except the Grayscale Ethereum Trust, propose to 
hold cash, and some Trusts also propose to hold cash equivalents, as 
described in their respective amended filings. See Bitwise Amendment 
at 5; iShares Amendment at 4; VanEck Amendment at 21; ARK Amendment 
at 20; Invesco Amendment at 22; Fidelity Amendment at 22; Franklin 
Amendment at 21.
    \15\ See infra Section III.
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II. Discussion and Commission Findings

    After careful review, the Commission finds that the Proposals are 
consistent with the Exchange Act and rules and regulations thereunder 
applicable to a national securities exchange.\16\ In

[[Page 46938]]

particular, the Commission finds that the Proposals are consistent with 
Section 6(b)(5) of the Exchange Act,\17\ which requires, among other 
things, that the Exchanges' rules be designed to ``prevent fraudulent 
and manipulative acts and practices'' and, ``in general, to protect 
investors and the public interest;'' and with Section 11A(a)(1)(C)(iii) 
of the Exchange Act,\18\ which sets forth Congress' finding that it is 
in the public interest and appropriate for the protection of investors 
and the maintenance of fair and orderly markets to assure the 
availability to brokers, dealers, and investors of information with 
respect to quotations for and transactions in securities.
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    \16\ In approving the Proposals, the Commission has considered 
the Proposals' impacts on efficiency, competition, and capital 
formation. See 15 U.S.C. 78c(f). See also infra note 61 and 
accompanying text, discussing comments received regarding the 
efficiency of spot ether exchange-traded products (``ETPs''). See 
also Letter from Ryan Posey, dated Mar. 20, 2024, regarding SR-
CboeBZX-2023-095 (``Posey Letter'') (stating that ``[t]he history of 
[exchange-traded funds] in other asset classes demonstrates how 
competition drives fees down''). Additionally, a commenter states 
that the Commission should approve spot ether ETPs, but not all at 
once, so as not to ``delay the innovators in order to allow free-
riding copycats a free hand.'' See Letter from James J. Angel, 
Georgetown University, dated Apr. 5, 2024, regarding SR-NYSEARCA-
2023-70 (``Angel Letter''), at 3-4. The Commission believes that it 
is appropriate to approve all of the Proposals at the same time in 
order to foster competition by potentially providing investors with 
several spot ether-based ETPs from which to choose. The shares of 
any Trust, however, may not begin trading on its applicable Exchange 
unless and until its corresponding registration statement becomes 
effective.
    \17\ 15 U.S.C. 78f(b)(5).
    \18\ 15 U.S.C. 78k-1(a)(1)(C)(iii).
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A. Exchange Act Section 6(b)(5)

    When considering proposals to list bitcoin-based commodity trusts 
and bitcoin-based trust issued receipts, the Commission has explained 
that one way an exchange that lists bitcoin-based ETPs can meet the 
obligation under Exchange Act Section 6(b)(5) that its rules be 
designed to prevent fraudulent and manipulative acts and practices is 
by demonstrating that the exchange has a comprehensive surveillance-
sharing agreement with a regulated market of significant size related 
to the underlying or reference assets.\19\ Such an agreement would 
assist in detecting and deterring fraud and manipulation related to 
that underlying asset.
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    \19\ See, e.g., Order Granting Accelerated Approval of Proposed 
Rule Changes, as Modified by Amendments Thereto, to List and Trade 
Bitcoin-Based Commodity-Based Trust Shares and Trust Units, 
Securities Exchange Act Release No. 99306 (Jan. 10, 2024), 89 FR 
3008 (Jan. 17, 2024) (SR-NYSEARCA-2021-90; SR-NYSEARCA-2023-44; SR-
NYSEARCA-2023-58; SR-NASDAQ-2023-016; SR-NASDAQ-2023-019; SR-
CboeBZX-2023-028; SR-CboeBZX-2023-038; SR-CboeBZX-2023-040; SR-
CboeBZX-2023-042; SR-CboeBZX-2023-044; SR-CboeBZX-2023-072) (``Spot 
Bitcoin ETP Approval Order''); Order Granting Approval of a Proposed 
Rule Change, as Modified by Amendment No. 2, To List and Trade 
Shares of the Teucrium Bitcoin Futures Fund Under NYSE Arca Rule 
8.200-E, Commentary .02 (Trust Issued Receipts), Securities Exchange 
Act Release No. 94620 (Apr. 6, 2022), 87 FR 21676 (Apr. 12, 2022) 
(SR-NYSEARCA-2021-53). The Commission has provided an illustrative 
definition for ``market of significant size'' to include a market 
(or group of markets) as to which (a) there is a reasonable 
likelihood that a person attempting to manipulate the ETP would also 
have to trade on that market to successfully manipulate the ETP, so 
that a surveillance-sharing agreement would assist in detecting and 
deterring misconduct, and (b) it is unlikely that trading in the ETP 
would be the predominant influence on prices in that market. See 
Order Setting Aside Action by Delegated Authority and Disapproving a 
Proposed Rule Change, as Modified by Amendments No. 1 and 2, To List 
and Trade Shares of the Winklevoss Bitcoin Trust, Securities 
Exchange Act Release No. 83723 (July 26, 2018), 83 FR 37579, 37594 
(Aug. 1, 2018) (SR-BatsBZX-2016-30) (``Winklevoss Order'').
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    The Commission has also consistently recognized, however, that this 
is not the exclusive means by which an ETP listing exchange can meet 
this statutory obligation.\20\ A listing exchange could, alternatively, 
demonstrate that ``other means to prevent fraudulent and manipulative 
acts and practices will be sufficient'' to justify dispensing with a 
surveillance-sharing agreement with a regulated market of significant 
size.\21\ Applying this same analytical framework to the spot ether to 
be held by the Trusts, the Commission finds that sufficient ``other 
means'' of preventing fraud and manipulation in this context have been 
demonstrated.
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    \20\ See Winklevoss Order, 83 FR at 37580; Spot Bitcoin ETP 
Approval Order, 89 FR at 3009.
    \21\ See Spot Bitcoin ETP Approval Order, 89 FR at 3009 (quoting 
Winklevoss Order, 83 FR at 37580).
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    Each Exchange has a comprehensive surveillance-sharing agreement 
with the Chicago Mercantile Exchange (``CME'') via their common 
membership in the Intermarket Surveillance Group.\22\ This facilitates 
the sharing of information that is available to the CME through its 
surveillance of its markets, including its surveillance of the CME 
ether futures market. Spot ether, however, does not trade on the CME 
and the CME does not engage in surveillance of spot ether markets. As 
with the proposals approved in the Spot Bitcoin ETP Approval Order, 
this raises questions regarding the sufficiency of a surveillance-
sharing agreement with the CME in preventing fraud and manipulation 
when the proposed ETPs hold spot ether.\23\ If a would-be manipulator 
of a spot ether ETP engages in misconduct (such as fraud, manipulation, 
or other trading abuses) on the CME itself, the CME's surveillance can 
be reasonably expected to detect such misconduct. But if the would-be 
manipulator is not transacting on the CME itself, the impacts of its 
misconduct would not necessarily be surveilled by the CME unless the 
misconduct also impacts the CME ether futures market. Thus, when 
assessing the sufficiency of a surveillance-sharing agreement with the 
CME, it is critical to establish whether, and to what extent, fraud or 
manipulation that impacts the spot ether market also impacts the CME 
ether futures market.\24\
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    \22\ See id. at 3009.
    \23\ See id.
    \24\ See id.
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    In the Spot Bitcoin ETP Approval Order, the Commission concluded 
that having a comprehensive surveillance-sharing agreement with a U.S.-
regulated market that, based on evidence from robust correlation 
analysis, is consistently highly correlated with the ETPs' underlying 
assets (spot bitcoin) constituted ``other means'' sufficient to satisfy 
the Exchange Act Section 6(b)(5) standard.\25\ Specifically, given the 
consistently high correlation between the CME bitcoin futures market 
and a sample of spot bitcoin markets--confirmed through robust 
correlation analysis using data at hourly, five-minute, and one-minute 
intervals--the Commission was able to conclude that fraud or 
manipulation that impacts prices in spot bitcoin markets would likely 
similarly impact CME bitcoin futures prices. And because the CME's 
surveillance can assist in detecting those impacts on CME bitcoin 
futures prices, the Exchanges' comprehensive surveillance-sharing 
agreement with the CME can be reasonably expected to assist in 
surveilling for fraudulent and manipulative acts and practices in the 
specific context of those proposals. The Commission indicated that the 
``robustness'' of its correlation analysis rested on the pre-requisites 
of (1) the correlations being calculated with respect to bitcoin 
futures that trade on the CME, a U.S. market regulated by the Commodity 
Futures Trading Commission (``CFTC''), (2) the lengthy sample period of 
price returns for both the CME bitcoin futures market and the spot 
bitcoin market, (3) the frequent intra-day trading data in both the CME 
bitcoin futures market and the spot bitcoin market over that lengthy 
sample period, and (4) the consistency of the correlation results 
throughout the lengthy sample period.\26\
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    \25\ See id. at 3009-11. To be clear, this does not mean that 
such U.S.-regulated market is of ``significant size'' related to the 
ETP's underlying or reference asset. In particular, the Commission 
did not conclude in the Spot Bitcoin ETP Approval Order that the CME 
bitcoin futures market is of ``significant size'' related to spot 
bitcoin. See id. at 3010-11 (``[B]ecause the CME's surveillance can 
assist in detecting those impacts on CME bitcoin futures prices, the 
Exchanges' comprehensive surveillance-sharing agreement with the 
CME--a U.S.-regulated market whose bitcoin futures market is 
consistently highly correlated to spot bitcoin, albeit not of 
`significant size' related to spot bitcoin--can be reasonably 
expected to assist in surveilling for fraudulent and manipulative 
acts and practices in the specific context of the Proposals.'') 
(emphasis added).
    \26\ See id. at 3010 n.38.

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[[Page 46939]]

    Several of the Proposals and some commenters offered correlation 
analyses in the ether context. Some Proposals provided correlation 
results that used data at a daily frequency. For example, the ARK 
Amendment finds a correlation between the daily returns of CME ether 
futures and daily returns on certain spot ether trading platforms of 
more than 99.89%; \27\ the VanEck Amendment, Invesco Amendment, and 
Franklin Amendment find daily correlation of 99.8%; \28\ and the 
iShares Amendment finds a daily correlation of 99.93%.\29\ However, as 
explained in the Spot Bitcoin ETP Approval Order, calculating 
correlation using only daily price observations provides no information 
on how prices in the two markets are associated--if at all--throughout 
the trading day; and calculating correlation for only the full sample 
period does not provide evidence of a consistently high correlation 
over time.\30\
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    \27\ See ARK Amendment at 14 (using data from Jan. 1, 2022, 
through Feb. 1, 2024).
    \28\ See VanEck Amendment at 13; Invesco Amendment at 14; 
Franklin Amendment at 13 (using data from Sept. 1, 2022, through 
Sept. 1, 2023).
    \29\ See iShares Amendment at 26 (using data from Oct. 13, 2022, 
through Oct. 13, 2023). Some commenters also assert that ether 
markets are highly correlated, but the commenters provide no 
evidence for this assertion. See Letter from Parker Jamieson, dated 
Mar. 12, 2024, regarding SR-CboeBZX-2023-095 (``Jamieson Letter''); 
Posey Letter.
    \30\ See Spot Bitcoin ETP Approval Order, 89 FR at 3009 n.30.
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    The Fidelity Amendment performed rolling 90-day correlations 
between daily returns of CME ether futures and six spot ether trading 
platforms and found correlations ranged between 94% and 99.8%.\31\ As 
indicated above, however, calculating correlations using only daily 
price observations--even on a rolling basis--provides no information on 
how prices are associated--if at all--throughout the trading day. The 
Fidelity Amendment also examined correlation using hourly returns data, 
and found such correlations for the full sample period to be above 
98%.\32\ While the filing does not provide rolling correlations using 
the hourly data, the filing examined the ``distribution of hourly 
returns'' and finds that at least 97.9% of the hourly returns of the 
spot ether platforms and the CME ether futures market are within 50 
basis points. The filing stated that ``[t]his suggests a high degree of 
similarity in price movements between the regulated exchange and the 
spot platforms for most hours.'' \33\
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    \31\ See Fidelity Amendment at 16 (the filing does not provide 
the exact range for its data sample, but based on the chart at 16, 
the range appears to be approximately July 2021 through Jan. 2024).
    \32\ See id. at 17-18.
    \33\ See id. at 18.
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    The use of hourly data, however, provides no indication of how 
prices move at finer increments. For example, the results provide no 
indication of whether price movements--including price manipulations--
in ether spot markets that persist for only a few minutes or less are 
likely to be reflected in CME ether futures prices. While the Fidelity 
Amendment's results may suggest a high degree of similarity in price 
movements between the CME ether futures market and the spot ether 
platforms ``for most hours,'' the results suggest nothing about the 
degree of similarity in price movements for most minutes within the 
hours.
    Two commenters and one Proposal examined correlation between the 
CME ether futures market and spot ether trading platforms at hourly, 
five-minute, and one-minute intervals. The Coinbase Letter used price 
returns data from March 1, 2021, through January 31, 2024, for the CME 
ether futures market and the Coinbase platform.\34\ This commenter 
calculated Pearson correlation statistics \35\ for the full sample 
period as well as for rolling three-month segments within the sample 
period. The commenter's correlation results for the full sample period 
are 99.3% using data at an hourly interval, 96.2% using data at a five-
minute interval, and 84.7% using data at a one-minute interval.\36\ The 
commenter states that these results ``show an even greater correlation 
than what was reported by the Commission'' in the Spot Bitcoin ETP 
Approval Order with respect to the CME bitcoin futures market and spot 
bitcoin trading platforms.\37\ The commenter also sought to replicate 
the same correlation analysis of the bitcoin market that the Commission 
performed for the Spot Bitcoin ETP Approval Order. The commenter's 
replication results also found greater correlation than what was 
reported in the Spot Bitcoin ETP Approval Order.\38\
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    \34\ See Letter from Paul Grewal, Chief Legal Officer, Coinbase 
Global, Inc., dated Feb. 21, 2024, regarding SR-NYSEARCA-2023-70 
(``Coinbase Letter''), at 20-22.
    \35\ Pearson correlation is a measure of linear association 
between two variables and indicates the magnitude as well as 
direction of this relationship. The value can range between -1 
(suggesting a strong negative association) and 1 (suggesting a 
strong positive association). Correlation should not be interpreted 
as an indication of a causal relationship or whether one variable 
leads or lags the other.
    \36\ See Coinbase Letter at 21. The Coinbase Letter's rolling 
correlation results ranged between 98.1% and 99.7% using data at an 
hourly interval, 93.8% and 97.1% using data at a five-minute 
interval, and 80.4% and 88% using data at a one-minute interval.
    \37\ See id.
    \38\ See id.
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    The CF Benchmarks Letters used price returns data from February 2, 
2022, through February 2, 2024, for the CME ether futures market and 
the Coinbase, Kraken, and LMAX Digital platforms.\39\ This commenter 
also calculated Pearson correlation statistics for its full sample 
period as well as for rolling three-month segments within that sample 
period. This commenter's correlation results for the full sample period 
are no less than 98.0% using data at an hourly interval, 91.5% using 
data at a five-minute interval, and 84.9% using data at a one-minute 
interval.\40\ The commenter states that these results are ``on the 
whole stronger'' than those that the Commission reported for the 
bitcoin market in the Spot Bitcoin ETP Approval Order.\41\
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    \39\ See Letters from CF Benchmarks, dated Mar. 22, 2024, 
regarding SR-CboeBZX-2024-018, and dated Apr. 11, 2024, regarding 
SR-NASDAQ-2023-045 (``CF Benchmarks Letters''), at 5-6.
    \40\ See id. at 6. The CF Benchmarks Letters' rolling 
correlation results ranged between 96.1% and 99.4% using data at an 
hourly interval, 81.3% and 94.7% using data at a five-minute 
interval, and 81.0% and 88.1% using data at a one-minute interval.
    \41\ See id. at 6.
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    The Bitwise Amendment used price returns data from August 1, 2021, 
through March 20, 2024, for the CME ether futures market and the 
Coinbase and Kraken platforms.\42\ This filing also calculated Pearson 
correlation statistics for its full sample period as well as for 
rolling three-month segments within that sample period. This filing's 
correlation results for the full sample period are no less than 98.6% 
using data at an hourly interval, 90.0% using data at a five-minute 
interval, and 70.9% using data at a one-minute interval.\43\
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    \42\ See Bitwise Amendment at 18-19.
    \43\ See id. The Bitwise Amendment's rolling correlation results 
ranged between 95.7% and 99.3% using data at an hourly interval, 
86.8% and 92.9% using data at a five-minute interval, and 65.0% and 
79.5% using data at a one-minute interval.
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    The Commission undertook to verify the Bitwise Amendment's and 
these two commenters' correlation results for certain spot ether 
markets. For robust \44\ results, the Commission used stationary time 
series of price returns data at hourly, five-minute, and one-minute 
intervals for the spot ETH/USD trading pair on Coinbase and Kraken, as 
well as for the closest-to-maturity CME ether futures contract, over a 
similarly lengthy sample period (October 1, 2021, through March 29, 
2024).\45\ Pearson correlation

[[Page 46940]]

statistics were calculated for the full sample period as well as for 
rolling three-month segments within the sample period. The Commission's 
correlation analysis utilized frequent intra-day trading data over the 
lengthy sample period on this subset of spot ether platforms \46\ and--
crucially--on the CME ether futures market as well.\47\
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    \44\ See also infra note 49.
    \45\ Data were sourced from the CME via the SEC's Market 
Information Data Analytics System (``MIDAS'') for the closest-to-
maturity CME ether futures contract price and from Kaiko for the 
ETH/USD prices on Coinbase and Kraken. The MIDAS CME ether futures 
data are limited to the 3:00 a.m.-5:00 p.m. ET, Monday through 
Friday, trading hours. All data sets used in the Commission's 
analysis are publicly available (although some require 
subscriptions). One-minute, five-minute, and hourly price level time 
series were created using the last trade price over the given 
interval for the spot ETH/USD pairs and the closest-to-maturity CME 
ether futures contract. For those time intervals during which there 
were no trades in the closest-to-maturity CME ether futures 
contracts or spot ether, the last trade price for the closest-to-
maturity CME ether futures contract (or last trade price for spot 
ether, as applicable) was used as the price for such time interval. 
Each price level time series was then log differenced to create 
price returns time series. The stationarity of each price returns 
time series was confirmed through Augmented Dickey-Fuller tests.
    \46\ The spot ether market is a 24-hour, global marketplace. 
However, due to the unregulated and fragmented nature of the spot 
ether market, there are no authoritative published figures for spot 
ether trading. Nonetheless, multiple sources of pricing information 
for the spot ether market are available 24 hours per day on public 
websites and through subscription services. See, e.g., Grayscale 
Amendment at 46 (stating that real-time price and volume data for 
ether is available by subscription from Reuters and Bloomberg).
    \47\ The CME ether futures market, which is regulated by the 
CFTC, has developed since its inception in February 2021 into an 
active market, growing from $64.3 million in average monthly open 
interest in February 2021 to $965.6 million in average monthly open 
interest in April 2024 (source: Refinitiv). Real-time trade 
information, including prices, for the CME ether futures market is 
made available through CME at: https://www.cmegroup.com/markets/cryptocurrencies/ether/ether.quotes.html#venue=globex and https://www.cmegroup.com/markets/cryptocurrencies/ether/micro-ether.quotes.html#venue=globex. But see infra note 49.
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    The results of the Commission's analysis confirm that the CME ether 
futures market has been consistently highly correlated with this subset 
of the spot ether market throughout the past 2.5 years. The correlation 
between the CME ether futures market and this subset of spot ether 
platforms for the full sample period is no less than 96.2 percent using 
data at an hourly interval, 85.7 percent using data at a five-minute 
interval, and 67.1 percent using data at a one-minute interval. The 
rolling three-month correlation results range between 86.4 and 98.4 
percent using data at an hourly interval, 75.8 and 90.2 percent using 
data at a five-minute interval, and 58.6 and 75.9 percent using data at 
a one-minute interval.

   Full-Sample and Post-Merge Correlations Between Certain Spot Ether Markets and the CME Ether Futures Market
                                             [MIDAS and Kaiko Data]
----------------------------------------------------------------------------------------------------------------
                                                   Coinbase                                Kraken
                                   -----------------------------------------------------------------------------
                                       Hourly     5 Minutes     1 Minute      Hourly     5 Minutes     1 Minute
----------------------------------------------------------------------------------------------------------------
Full Sample: October 1, 2021,              96.2         85.7         67.1         96.3         86.5         69.0
 through March 29, 2024...........
Rolling Three-Month Correlations
 Over the Full Sample Period:
    Maximum.......................         98.4         90.1         74.5         98.4         90.2         75.9
    Minimum.......................         86.4         75.8         58.6         86.6         77.1         61.6
----------------------------------------------------------------------------------------------------------------
The Commission also examined correlation between the CME ether futures market and the Coinbase and Kraken spot
 ether trading platforms at hourly, five-minute, and one-minute intervals, using the same data sources and
 methodology (see note 45), for the period after the Ethereum Network changed from a Proof-of-Work to a Proof-of-
 Stake consensus mechanism in September 2022 (``post-Merge''). The results indicate that correlation has been
 similarly high and consistent during just the post-Merge period.
----------------------------------------------------------------------------------------------------------------
Post-Merge Sample: September 16,           94.1         84.1         68.0         94.1         85.0         69.9
 2022, through March 29, 2024.....
Rolling Three-Month Correlations
 Over the Post-Merge Sample:
    Maximum.......................         98.4         88.3         73.1         98.4         89.3         75.9
    Minimum.......................         86.4         75.8         61.0         86.6         77.1         62.8
----------------------------------------------------------------------------------------------------------------

    The Commission further examined correlation between the CME ether 
futures market and the Coinbase and Kraken spot ether trading platforms 
at hourly, five-minute, and one-minute intervals in a recent month, 
March 2024, sourcing CME ether futures market data from Refinitiv.\48\ 
The results indicate similar correlation: no less than 97.6 percent 
using data at an hourly interval, 86.0 percent using data at a five-
minute interval, and 62.5 percent using data at a one-minute interval.
---------------------------------------------------------------------------

    \48\ Data were sourced from Refinitiv for the closest-to-
maturity CME ether futures contract price and from Kaiko for the 
ETH/USD prices on Coinbase and Kraken. The Refinitiv CME ether 
futures data cover the CME's full 23 trading hours. All data sets 
used in the Commission's analysis are publicly available (although 
some require subscriptions). The Commission used the same 
methodology as summarized in note 45 above.

                Correlations Between Certain Spot Ether Markets and the CME Ether Futures Market
                                           [Refinitiv and Kaiko Data]
----------------------------------------------------------------------------------------------------------------
                                              Coinbase                                   Kraken
                             -----------------------------------------------------------------------------------
                                 Hourly       5 Minutes     1 Minute       Hourly       5 Minutes     1 Minute
----------------------------------------------------------------------------------------------------------------
March 2024..................         97.6          86.0          62.5          97.7          87.5          67.0
----------------------------------------------------------------------------------------------------------------


[[Page 46941]]

    The results of the Commission's robust correlation analysis \49\ 
provide empirical evidence that prices generally move in close 
(although not perfect) alignment between the spot ether market and the 
CME ether futures market.\50\ As such, based on the record before the 
Commission and the correlation analyses in the record, including the 
Commission's own analysis, the Commission is able to conclude that 
fraud or manipulation that impacts prices in spot ether markets would 
likely similarly impact CME ether futures prices. And because the CME's 
surveillance can assist in detecting those impacts on CME ether futures 
prices, the Exchanges' comprehensive surveillance-sharing agreement 
with the CME--a U.S.-regulated market whose ether futures market is 
consistently highly correlated to spot ether, albeit not of 
``significant size'' related to spot ether--can be reasonably expected 
to assist in surveilling for fraudulent and manipulative acts and 
practices in the specific context of the Proposals.\51\
---------------------------------------------------------------------------

    \49\ The robustness of the Commission's correlation analysis 
rests on the pre-requisites of (1) the correlations being calculated 
with respect to ether futures that trade on the CME, a U.S. market 
regulated by the CFTC, (2) the lengthy sample period of price 
returns for both the CME ether futures market and the spot ether 
market, (3) the frequent intra-day trading data in both the CME 
ether futures market and the spot ether market over that lengthy 
sample period, and (4) the consistency of the correlation results 
throughout the lengthy sample period. The relatively low frequency 
of trading in CME ether futures, however, makes condition (3) 
particularly difficult to assess. Over the Commission's full sample 
period from October 1, 2021, through March 29, 2024, using MIDAS 
data (see note 45 above), front-month CME ether futures traded on 
average only 3.05 times per minute, and did not trade during 47% of 
the one-minute intervals. For comparison, over this same sample, 
front-month CME bitcoin futures traded on average 5.11 times per 
minute, and did not trade during 37% of the one-minute intervals. As 
explained in note 45 above, the Commission (1) used prior prices for 
the 47% of minutes during which front-month CME ether futures did 
not trade, which likely affected the correlation results. 
Alternatively, the Commission could have (2) dropped this 47% of 
minutes from the sample, but this also likely would have affected 
the correlation results. As the portion of no-trade minutes 
increases, the correlation results from both methodologies (1) and 
(2) become increasingly unreliable, because a larger and larger 
percentage of data is either dropped altogether (methodology (2)) or 
estimated with prior prices, potentially from distant past time 
intervals (methodology (1)). Consequently, with respect to future 
proposed spot ETPs, if trading on the regulated market is even less 
frequent, it may be more difficult to use correlation analysis to 
establish the sufficiency of a surveillance-sharing agreement with 
the regulated market.
    \50\ Correlation should not be interpreted as an indicator of a 
causal relationship or whether one variable leads or lags the other.
    \51\ One commenter argues that the Commission's use of 
correlation as a basis for approval is ``problematic'' because (1) 
it relies on a subset of spot markets which may not be 
representative of the entirety of the spot markets worldwide; (2) 
the fact that prices between the spot market and the CME futures 
market ``generally move in close alignment does not account for the 
times when the prices are not aligned,'' and thus ``the entire 
premise that price correlation leads to reliable detection of 
manipulation is fatally flawed;'' and (3) ``the fact that two 
variables are correlated in the past does not mean they will 
continue to be correlated in the future.'' See Letter from Dennis M. 
Kelleher, Co-Founder, President, and CEO, and Stephen W. Hall, Legal 
Director and Securities Specialist, Better Markets, Inc., dated Jan. 
12, 2024, regarding SR-CboeBZX-2023-070 and SR-CboeBZX-2023-069 
(``Better Markets Letter 1''), at 6-7. Regarding (1), the Commission 
selected the spot ether trading platforms of Coinbase and Kraken 
because these platforms have the largest volume of ETH/USD spot 
trading; whereas on other platforms, ETH trading typically occurs 
through so-called ``stablecoins'' and thus has prices that may be 
affected by USD/stablecoin rate fluctuations. Regarding (3), the 
Commission assessed the consistency of correlation over the full 
sample period through rolling 90-day correlations. The Commission 
does not detect any trends in the rolling correlations that would 
lead it to expect that the correlation would not be similarly high 
in the future. Both the post-Merge correlations and the March 2024 
correlations using Refinitiv data indicate that correlations have 
recently been similar to the full sample period. Regarding (2), the 
Commission does not consider the use of correlation analysis in the 
context of the Proposals to be ``fatally flawed.'' However, the 
Commission agrees that the lower the frequency of trading in the CME 
futures market, the greater the risk that a price movement in spot 
markets would not be similarly reflected in a price movement in the 
CME futures market, notwithstanding seemingly high correlation 
results. For this reason, the Commission has explained that robust 
correlation analysis requires, among others, that there be frequent 
intra-day trading data in the CME futures market (see Spot Bitcoin 
ETP Approval Order, 89 FR at 3010 n.38).
---------------------------------------------------------------------------

B. Exchange Act Section 11A(a)(1)(C)(iii)

    Each Proposal sets forth aspects of its proposed ETP, including the 
availability of pricing information, transparency of portfolio 
holdings, and types of surveillance procedures, that are consistent 
with other ETPs that the Commission has approved.\52\ This includes 
commitments regarding: the availability via the relevant securities 
information processor of quotation and last-sale information for the 
shares of each Trust; the availability on the websites of each Trust of 
certain information related to the Trusts' intra-day indicative values 
(``IIV'') and net asset values; the dissemination of IIV by one or more 
major market data vendors, updated every 15 seconds throughout the 
Exchanges' regular trading hours; the Exchanges' surveillance 
procedures and ability to obtain information regarding trading in the 
shares of the Trusts; the conditions under which the Exchanges would 
implement trading halts and suspensions; and the requirements of 
registered market makers in the shares of each Trust.\53\ In addition, 
in each Proposal, the applicable Exchange deems the shares of the 
applicable Trust to be equity securities, thus rendering trading in 
such shares subject to that Exchange's existing rules governing the 
trading of equity securities.\54\ Further, the applicable listing rules 
of each Exchange require that all statements and representations made 
in its filing regarding, among others, the description of the 
applicable Trust's holdings, limitations on such holdings, and the 
applicability of that Exchange's listing rules specified in the filing, 
will constitute continued listing requirements.\55\ Moreover, each 
Proposal states that: its issuer has represented to the applicable 
Exchange that it will advise that Exchange of any failure to comply 
with the applicable continued listing requirements; pursuant to 
obligations under Section 19(g)(1) of the Exchange Act, that Exchange 
will monitor for compliance with the continued listing requirements; 
and if the applicable Trust is not in compliance with the applicable 
listing requirements, that Exchange will commence delisting 
procedures.\56\
---------------------------------------------------------------------------

    \52\ See, e.g., Spot Bitcoin ETP Approval Order, 89 FR at 3011; 
Securities Exchange Act Release No. 61220 (Dec. 22, 2009), 74 FR 
68895 (Dec. 29, 2009) (SR-NYSEARCA-2009-94) (Order Granting Approval 
of Proposed Rule Change Relating To Listing and Trading Shares of 
the ETFS Palladium Trust); Securities Exchange Act Release No. 94518 
(Mar. 25, 2022), 87 FR 18837 (Mar. 31, 2022) (SR-NYSEARCA-2021-65) 
(Notice of Filing of Amendment No. 1 and Order Granting Accelerated 
Approval of a Proposed Rule Change, as Modified by Amendment No. 1, 
To List and Trade Shares of the Sprott ESG Gold ETF Under NYSE Arca 
Rule 8.201-E (Commodity-Based Trust Shares)).
    \53\ See ARK Amendment at 28-30, 33-39; Bitwise Amendment at 19-
23; Fidelity Amendment at 25-28, 31-37; Franklin Amendment at 25-28, 
30-36; Grayscale Amendment at 45-49; Invesco Amendment at 25-27, 30-
36; iShares Amendment at 12-16, 34-41; VanEck Amendment at 25-28, 
30-36.
    \54\ See ARK Amendment at 36; Bitwise Amendment at 21; Fidelity 
Amendment at 34; Franklin Amendment at 34; Grayscale Amendment at 
46; Invesco Amendment at 33; iShares Amendment at 37; VanEck 
Amendment at 34.
    \55\ See Nasdaq Rule 5711(d)(iii); NYSE Arca Rule 8.201-
E(e)(2)(vii); BZX Rule 14.11(a).
    \56\ See ARK Amendment at 38; Bitwise Amendment at 23; Fidelity 
Amendment at 36; Franklin Amendment at 35; Grayscale Amendment at 
49; Invesco Amendment at 35; iShares Amendment at 33; VanEck 
Amendment at 35.

---------------------------------------------------------------------------

[[Page 46942]]

    The Commission therefore finds that the Proposals, as with other 
ETPs that the Commission has approved,\57\ are reasonably designed to 
promote fair disclosure of information that may be necessary to price 
the shares of the Trusts appropriately, to prevent trading when a 
reasonable degree of transparency cannot be assured, to safeguard 
material non-public information relating to the Trusts' portfolios, and 
to ensure fair and orderly markets for the shares of the Trusts.
---------------------------------------------------------------------------

    \57\ See supra note 52.
---------------------------------------------------------------------------

C. Other Comments

    One commenter asserts that the Commission should approve the 
Proposals because CME ether futures exchange-traded funds (``ETFs'') 
registered under the Investment Company Act of 1940 (``1940 Act'') are 
already trading on national securities exchanges ``and possess much 
more potential for manipulation of the underlying asset.'' \58\ Another 
commenter states that the Commission should approve the Proposals 
because ``[t]here is no difference between the [spot bitcoin ETP] 
approval and the [spot ether ETPs] at this point.'' \59\
---------------------------------------------------------------------------

    \58\ See Letter from Patrick Turley, dated Apr. 3, 2024, 
regarding SR-NASDAQ-2023-045 (``Turley Letter'').
    \59\ See Jamieson Letter.
---------------------------------------------------------------------------

    The Commission has considered and, for the reasons described above, 
is approving the Proposals on their own merits and under the standards 
applicable to them; namely, the standards provided by Section 6(b)(5) 
and Section 11A(a)(1)(C)(iii) of the Exchange Act.\60\ As described 
above, based on the record before the Commission and the Commission's 
own correlation analysis, the Commission concludes that fraud or 
manipulation that impacts prices in spot ether markets would likely 
similarly impact CME ether futures prices, such that a surveillance-
sharing agreement with the CME can be reasonably expected to assist in 
surveilling for fraud and manipulation that may impact the proposed 
spot ether ETPs.
---------------------------------------------------------------------------

    \60\ 15 U.S.C. 78f(b)(5); 15 U.S.C. 78k-1(a)(1)(C)(iii).
---------------------------------------------------------------------------

    Some commenters state that the Commission should approve the 
Proposals for a variety of investor protection reasons, including that 
spot ether ETPs would be a less costly and more efficient,\61\ more 
convenient and secure,\62\ and more regulated \63\ way to gain exposure 
to spot ether. The Exchanges make similar investor protection arguments 
in support of approval.\64\
---------------------------------------------------------------------------

    \61\ See, e.g., Posey Letter; Letter from William Entriken, 
dated Oct. 31, 2023, regarding SR-NYSEARCA-2023-70; Letter from 
Brent Wickenheiser, dated Apr. 3, 2024, regarding SR-NYSEARCA-2023-
70 (``Wickenheiser Letter''); Letter from Dirk Hooley, dated Apr. 3, 
2024, regarding SR-NYSEARCA-2023-70; Letter from Kevin Thompson, 
dated Apr. 3, 2024, regarding SR-NASDAQ-2023-045 (``Thompson 
Letter'').
    \62\ See, e.g., Posey Letter; Wickenheiser Letter; Thompson 
Letter; Turley Letter; Letter from Anonymous, dated Apr. 3, 2024, 
regarding SR-CboeBZX-2023-095; Letter from Anonymous, dated Apr. 5, 
2024, regarding SR-NASDAQ-2023-045.
    \63\ See, e.g., Posey Letter; Thompson Letter; Angel Letter at 
7-8.
    \64\ See, e.g., ARK Amendment at 8-13; iShares Amendment at 18-
20, 33-34; Bitwise Amendment at 17. However, another commenter 
states that the Commission should approve the Proposals because 
``when it comes to crypto, things happen so fast that there is no 
legitimate protection possible.'' See Letter from El Norro, dated 
Dec. 1, 2023, regarding SR-CboeBZX-2023-095 (``Norro Letter'').
---------------------------------------------------------------------------

    Another commenter disagrees that the ETP investment vehicle would 
protect investors, stating that the value of an investment in a spot 
ether ETP would be subject to the same risks of fraud and manipulation 
in the spot ether market as holding ether directly, and that ETPs are 
not subject to the Commission's examination authority, custody 
requirements, or conflicts of interest rules of ETFs registered under 
the 1940 Act.\65\ This commenter further states that any purported 
investor protections from an ETP compared to an ``even-worse over-the-
counter market'' do not neutralize concerns about fraud and 
manipulation.\66\
---------------------------------------------------------------------------

    \65\ See Better Markets Letter 1 at 4. While many of the Trusts 
use ``ETF'' or ``Fund'' in their names, none is registered under the 
1940 Act.
    \66\ See id. See also Letter from Senator Jack Reed and Senator 
Laphonza Butler, dated Mar. 11, 2024. But see Letter from 
Representatives French Hill, Josh Gottheimer, Tom Emmer, Wiley 
Nickel, and Mike Flood, dated May 22, 2024.
---------------------------------------------------------------------------

    This commenter also states that the price volatility of ether means 
that spot ether ETPs would threaten retail investors by exposing them 
to an unstable asset.\67\ The commenter further states that approving 
spot ether ETPs ``would threaten not just investors but also the 
broader financial system'' by ``further entangl[ing] the crypto 
industry with traditional finance and aggravat[ing]'' risks similar to 
risks that the commenter claims are posed by spot bitcoin ETPs, such as 
bitcoin price volatility and dislocations between the price of a spot 
bitcoin ETP and bitcoin that can ``cause stress for institutions 
heavily exposed to'' or reliant on spot bitcoin ETPs.\68\
---------------------------------------------------------------------------

    \67\ See Letter from Benjamin L. Schiffrin, Director of 
Securities Policy, Better Markets, Inc., dated May 15, 2024, 
regarding SR-CboeBZX-2023-069 and SR-CboeBZX-2023-070 (``Better 
Markets Letter 2''), at 4-7.
    \68\ See id. at 8. The commenter, however, provided no data on 
financial institutions' exposure to spot bitcoin ETPs or likely 
exposure to spot ether ETPs.
---------------------------------------------------------------------------

    The Commission has considered these potential benefits and concerns 
in the broader context of whether the Proposals meet the applicable 
requirements of the Exchange Act,\69\ including the requirement in 
Section 6(b)(5) \70\ that the Exchanges' rules be designed to ``prevent 
fraudulent and manipulative acts and practices.'' For the reasons 
described above, the Commission has determined that the Proposals meet 
such requirements.
---------------------------------------------------------------------------

    \69\ See also Winklevoss Order, 83 FR at 37602.
    \70\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Commission also finds that the Proposals are consistent with 
the Section 6(b)(5) requirement that the Exchanges' rules be designed 
to protect investors and the public interest because, in addition to 
the factors discussed in Section II.A and II.B above, existing rules 
and standards of conduct would apply to recommending and advising 
investments in the shares of the Trusts. For example, when broker-
dealers recommend ETPs to retail customers, Regulation Best Interest 
(``Reg BI'') would apply.\71\ Reg BI requires broker-dealers to, among 
other things, exercise reasonable diligence, care, and skill when 
making a recommendation to a retail customer to: (1) understand 
potential risks, rewards, and costs associated with the recommendation 
and have a reasonable basis to believe that the recommendation could be 
in the best interest of at least some retail customers; and (2) have a 
reasonable basis to believe the recommendation is in the best interest 
of a particular retail customer based on that retail customer's 
investment profile.\72\ In addition, investment advisers have a 
fiduciary duty under the 1940 Act comprised of a duty of care and a 
duty of loyalty. These obligations require the adviser to act in the 
best interest of its client and

[[Page 46943]]

not subordinate its client's interest to its own.\73\
---------------------------------------------------------------------------

    \71\ Exchange Act rule 15l-1(a).
    \72\ Exchange Act rules 15l-1(a)(2)(ii)(A) and (B). Separately, 
under Reg BI's Conflict of Interest Obligation, broker-dealers must 
establish, maintain, and enforce written policies and procedures 
reasonably designed to, among other things, identify and disclose or 
eliminate all conflicts of interest associated with a recommendation 
and mitigate conflicts of interest at the associated person level. 
See Exchange Act rules 15l-1(a)(2)(iii)(A) and (B). To the extent 
that broker-dealers recommend ETPs to customers who are not retail 
customers covered by Reg BI, FINRA Rule 2111 requires, in part, that 
a member broker-dealer or associated person ``have a reasonable 
basis to believe that a recommended transaction or investment 
strategy involving a security or securities is suitable for the 
customer, based on the information obtained through the reasonable 
diligence of the [broker-dealer] or associated person to ascertain 
the customer's investment profile.''
    \73\ See Commission Interpretation Regarding Standard of Conduct 
for Investment Advisers, Investment Advisers Act Release No. 5248 
(June 5, 2019), 84 FR 33669 (July 12, 2019), at 33671; Investment 
Company Act Release No. 34084 (Nov. 2, 2020), 85 FR 83162 (Dec. 21, 
2020), at 83217 (discussing the best interest standard of conduct 
for broker-dealers and the fiduciary obligations of investment 
advisers in the context of all ETPs).
---------------------------------------------------------------------------

    Some commenters contend that the Commission should disapprove the 
Proposals because the nature of ether and the Ethereum Network makes 
them inherently susceptible to fraud and manipulation.\74\ Other 
commenters argue that the nature of ether and the Ethereum Network 
makes them inherently resistant to fraud and manipulation.\75\ The 
Commission acknowledges commenters' concerns regarding fraud and 
manipulation. Pursuant to Section 19(b)(2) of the Exchange Act, 
however, the Commission must approve a proposed rule change filed by a 
national securities exchange if it finds that the proposed rule change 
is consistent with the applicable requirements of the Exchange Act.\76\ 
For the reasons described above, the Commission finds that the 
Proposals satisfy the requirements of the Exchange Act, including the 
requirement in Section 6(b)(5) \77\ that the Exchanges' rules be 
designed to ``prevent fraudulent and manipulative acts and practices.''
---------------------------------------------------------------------------

    \74\ See, e.g., Better Markets Letter 1 at 3 (asserting that 
relays are responsible for adding blocks of transactions to the 
Ethereum Blockchain, and recently one infrastructure provider exited 
the network, which left ``only four other major relay players to 
handle most Ethereum blocks and raises concern of potential 
problems, ranging from censorship of transactions to stealing of 
other key operators' profits''; that in addition to relays, the 
Ethereum Network is run by ``parties called builders, which compile 
most transactions into blocks, and validators, which order blocks 
into a blockchain,'' but that both ``builder and validator functions 
are dominated by a handful of participants''; and that ``[a] 
validator controlling 34% could potentially falsify transactions'' 
and one validator currently controls 32.3% of validator power and 
four builders account for the majority of blocks built); Letter from 
Robert, dated Apr. 23, 2024, regarding CboeBZX-2023-095 (stating 
that proof-of-stake is centralizing because as the ``pile of 
[validators'] ether token increases, so does their ability to 
capture control over the network''; and that ``the founding entities 
never relinquished control over the network'' despite the Ethereum 
Foundation's ``deceptive affinity marketing'' to the contrary); 
Letter from Brandon, dated Apr. 4, 2024, regarding SR-NYSEARCA-2023-
70 (``Control of the network will inevitably centralize . . . 
because only the largest holders are the ones rewarded with new 
coins''; and ``the entire [Ethereum Blockchain] can be manipulated 
by the foundation, such as after the DAO attack where the chain was 
rolled back by the organization''); Letter from James Keeton, dated 
Apr. 3, 2024, regarding SR-NASDAQ-2023-045 (``[T]he merge to proof 
of stake in 2022 solidified the lack of decentralization of this 
blockchain''); Letter from Anonymous, dated Mar. 5, 2024, regarding 
SR-NASDAQ-2023-045 (``Proof of stake is just another mechanism for 
more increased centralization and control over the network by the 
biggest stakers.''); Letter from Luther, dated Apr. 3, 2024, 
regarding SR-NASDAQ-2023-045 (``The Ethereum [F]oundation is the 
centralized entity that controls the protocol . . . [T]hey regularly 
push out hard forks to their centralized node infrastructure to make 
protocol changes. In a truly decentralized system this would not be 
possible.'').
    \75\ See, e.g., Coinbase Letter at 2 (asserting that the 
technological and operational security mechanisms inherent in the 
Ethereum Blockchain significantly limit ether's susceptibility to 
fraud and manipulation); Letter from Laura Brookover, Matt Corva, 
and William C. Hughes, Consensys Software Inc., dated Mar. 29, 2024, 
regarding SR-NASDAQ-2023-045, SR-CboeBZX-2023-087, and SR-CboeBZX-
2023-095 (``Consensys Letter''), at 2-7 (arguing that Ethereum's 
proof-of-stake consensus mechanism ``has several built-in 
protections providing additional security against fraud and 
manipulation,'' including: its block finality model provides 
increased reliability and integrity; the division of labor between 
two groups of block validators, proposers and attesters, ``serves as 
a check and balance against error and manipulation;'' the cost to an 
attacker group of obtaining the percentage of Ethereum nodes 
required to compromise the network is greater than for the Bitcoin 
Network; and the ``slashing'' that ``penalizes validators who 
violate protocol rules by docking their stakes . . . serves as both 
a punitive measure and a deterrent.'' This commenter also states 
that the ``active and sizable developer community'' enhances 
Ethereum's resilience against attacks; the redundancy afforded by 
independent open source software clients means that ``network 
integrity is maintained even if one software client fails due to a 
bug or malicious exploit;'' and the ``inherent transparency'' of 
Ethereum's public protocol development ``forms a significant barrier 
to fraud and manipulation at the protocol level.''); Letter from 
Chris McCullough, dated Apr. 3, 2024, regarding SR-NASDAQ-2023-045 
(citing unspecified ``advanced safeguards inherent in Ethereum's 
design''); Letter from Anonymous, dated Mar. 24, 2024, regarding SR-
NASDAQ-2023-045 (``Anonymous Letter''), at 4 (arguing that the 
decentralization of ether software clients ``helps mitigate the 
risks posed by bugs, although some concentration is still observed 
in a few clients''); Letter from Nathan Yang, dated Apr. 7, 2024, 
regarding SR-NYSEARCA-2024-31.
    \76\ See Exchange Act Section 19(b)(2)(C), 15 U.S.C. 
78s(b)(2)(C). The Commission does not apply a ``cannot be 
manipulated'' standard; rather, the Commission examines whether a 
proposal meets the requirements of the Exchange Act. See, e.g., 
Winklevoss Order, 83 FR at 37582. The Commission does not understand 
the Exchange Act to require that a particular product or market be 
immune from manipulation. Rather, the inquiry into whether the rules 
of an exchange are designed to prevent fraudulent and manipulative 
acts and practices and, in general, to protect investors and the 
public interest, has long focused on the mechanisms in place for the 
detection and deterrence of fraud and manipulation.
    \77\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    Commenters also address, among other things: investor demand for 
spot ether ETPs; \78\ environmental considerations of Ethereum's proof-
of-stake consensus mechanism; \79\ whether to permit a Trust to stake 
its ether; \80\ and the potential disadvantage from Commission 
disapproval of spot ether ETPs to U.S. innovation \81\ and to U.S. 
investors compared to those in other countries.\82\ Ultimately, 
however, for the reasons described above, the Commission is approving 
the Proposals because it finds that the Proposals satisfy the 
requirements of the Exchange Act, including the requirement in Section 
6(b)(5) \83\ that the Exchanges' rules be designed to ``prevent 
fraudulent and manipulative acts and practices.''
---------------------------------------------------------------------------

    \78\ See, e.g., Jamieson Letter; Letter from John, dated Apr. 4, 
2024, regarding SR-CboeBZX-2023-095 (``John Letter''); Letter from 
Johanes Swenberg, dated Apr. 3, 2024, regarding SR-CboeBZX-2023-095; 
Letter from Shaun Cumby, dated Apr. 3, 2024, regarding SR-NASDAQ-
2023-045.
    \79\ See, e.g., Anonymous Letter at 2; Consensys Letter at 6; 
John Letter; Letter from Brett, dated Apr. 4, 2024, regarding SR-
NASDAQ-2023-045.
    \80\ See, e.g., Better Markets Letter 2 at 7-8; Anonymous Letter 
at 3; Turley Letter. The Proposals under consideration by the 
Commission in this order do not contemplate staking of the Trusts' 
ether. Accordingly, the relative benefits or drawbacks of staking 
are outside the scope of this order. Any future proposal of a Trust 
to, directly or indirectly, engage in action where any portion of 
the Trust's ether becomes subject to the Ethereum proof-of-stake 
validation or is used to earn additional ether or generate income or 
other earnings would require the applicable Exchange to submit a 
proposed rule change under Rule 19b-4.
    \81\ See, e.g., Turley Letter.
    \82\ See, e.g., Norro Letter.
    \83\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

III. Accelerated Approval of the Proposals

    The Commission finds good cause to approve the Proposals prior to 
the 30th day after the date of publication of notice of the Exchanges' 
amended filings \84\ in the Federal Register. The amended filings 
clarified the descriptions of the Trusts; further described the terms 
of the Trusts; and conformed various representations in the amended 
filings to the applicable Exchange's listing standards and to 
representations that the Exchanges have made for other ETPs that the 
Commission has approved.\85\ These changes do not raise any novel 
regulatory issues. Further, the changes assist the Commission in 
evaluating the Proposals and in determining that they are consistent 
with the Exchange Act and the rules and regulations thereunder 
applicable to a national securities exchange, as discussed above. 
Accordingly, the Commission finds good cause, pursuant to Section 
19(b)(2) of the Exchange Act,\86\ to approve the Proposals on an 
accelerated basis.
---------------------------------------------------------------------------

    \84\ See supra notes 3-10.
    \85\ See also supra Section II.B.
    \86\ 15 U.S.C. 78s(b)(2).
---------------------------------------------------------------------------

IV. Conclusion

    This approval order is based on all of the Exchanges' 
representations and descriptions in their respective amended filings, 
which the Commission has carefully evaluated as discussed

[[Page 46944]]

above.\87\ For the reasons set forth above, including the Commission's 
correlation analysis, the Commission finds, pursuant to Section 
19(b)(2) of the Exchange Act,\88\ that the Proposals are consistent 
with the requirements of the Exchange Act and the rules and regulations 
thereunder applicable to a national securities exchange, and in 
particular, with Section 6(b)(5) and Section 11A(a)(1)(C)(iii) of the 
Exchange Act.\89\
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    \87\ See supra notes 3-10. In addition, the shares of the Trusts 
in SR-NYSEARCA-2023-70 and NYSEARCA-2024-31 must comply with the 
requirements of NYSE Arca Rule 8.201-E (Commodity-Based Trust 
Shares) to be listed and traded on NYSE Arca on an initial and 
continuing basis; the shares of the Trust in SR-NASDAQ-2023-045 must 
comply with the requirements of Nasdaq Rule 5711(d) (Commodity-Based 
Trust Shares) to be listed and traded on Nasdaq on an initial and 
continuing basis; and the shares of the Trusts in SR-CboeBZX-2023-
069, SR-CboeBZX-2023-070, SR-CboeBZX-2023-087, SR-CboeBZX-2023-095, 
and SR-CboeBZX-2024-018 must comply with the requirements of BZX 
Rule 14.11(e)(4) (Commodity-Based Trust Shares) to be listed and 
traded on BZX on an initial and continuing basis.
    \88\ 15 U.S.C. 78s(b)(2).
    \89\ 15 U.S.C. 78f(b)(5); 15 U.S.C. 78k-1(a)(1)(C)(iii).
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    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Exchange Act,\90\ that the Proposals (SR-NYSEARCA-2023-70; SR-NYSEARCA-
2024-31; SR-NASDAQ-2023-045; SR-CboeBZX-2023-069; SR-CboeBZX-2023-070; 
SR-CboeBZX-2023-087; SR-CboeBZX-2023-095; SR-CboeBZX-2024-018) be, and 
hereby are, approved on an accelerated basis.
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    \90\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\91\
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    \91\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2024-11804 Filed 5-29-24; 8:45 am]
BILLING CODE 8011-01-P